Lehman Brothers and the Impact to the Great Recession
The question before me is if Lehman Brothers had been bailed out and not allowed to fail and declare bankruptcy, would it have prevented the Great Recession. My answer based upon my reading and research would lead me to the conclusion of no it would not have prevented the Great Recession. However, their failure did have an impact on the Great Recession.
Lehman Brothers filed bankruptcy in September of 2008. It was the largest bankruptcy in the history of the United States (MacEwan and Miller, p.110). They were the fourth largest investment bank in the nation and had been in existence since 1850. Their collapse was the ...view middle of the document...
This takeover was also a result of heavy investment by Fannie Mae and Freddie Mac in mortgage backed securities that were now either worthless or worth little compared to the amount invested. The government purchased up to $200 billion in preferred stock in the two institutions and also provided them extensive credit (MacEwan and Miller, p. 109)
Based on these two actions by the federal government and the position of Bernanke and Treasury Secretary Henry Paulson, the message had been sent that the government would do what was necessary to “protect the viability of the financial system and the rest of the economy” (MacEwan and Miller, p. 109). So what happened with Lehman Brothers? Why did Bernanke and Paulson not act to bail them out? Why were they allowed to fail and what impact did this ultimately have on the Great Recession?
Allowing the collapse of Lehman Brothers was not the sole reason for the failure of the economy. In addition to the government already bailing out Bears and Stearns, Freddie Mac and Fannie Mae, the government on the day after Lehman Brothers’ bankruptcy filing, then bailed out AIG almost immediately to the tune of $85 billion. These events were also key indicators and components of the failure of the economy resulting in the Great Recession. Also another factor of reality was the collapse of the economy was already in progress because of the housing bubble bursting. The housing bubble bust had a major impact on the world’s financial markets not just the financial market of the US. There was also economic chaos in the lives of the people of this nation due to high unemployment, inflated housing prices, and overextended credit related to the housing bubble as well as poorly regulated financial markets with regard to lending in the housing market and to the consumer market.
The Great Recession was already underway before the Lehman Brothers bankruptcy, Lehman Brothers was just one piece of the puzzle. However, it did exacerbate an already bad situation (MacEwan and Miller, p. 110). One would ask the question though, why was Lehman Brothers not bailed out and what would the impact have been if that had occurred. No one seems to have a good answer or to even know why Lehman Brothers was handled differently by the government. A general consensus in the economic community was that it was complete and total incompetence on the part of Bernanke and Paulson. They were caught between their ideology of a free market economy that would succeed and the reality of the situation of the impending total financial collapse of the world’s financial system. Therefore, they acted in a contradictory manner. As a result of their inconsistent actions, they created an atmosphere of financial insecurity as well as a lack of credibility in the government.
The inconsistent actions and not bailing out Lehman Brothers resulted in an “intensification of the problems in the credit markets” (Wolfson, The Economic Crisis...